In Part 1 of this two-part series, Jason I. Miller introduces the assignment and assumption structure and its benefits, discusses the factors a lender can use to determine whether it is ultimately a beneficial strategy to pursue under the circumstances, and begins to focus on key provisions typically found in an assignment and assumption agreement.

Today’s two-edged lending environment of abundant liquidity and low credit standards has created soft pricing for secured lenders. This, coupled with the simultaneous pressure to close deals as quickly and inexpensively as possible, is compelling lenders to rethink their lending strategies. More and more often lately, lenders offering refinancing have been using a strategy of taking out the existing lender through an assignment of the loan and the underlying loan documents, documented by an assignment and assumption agreement. This strategy can, depending on several factors, be a quicker and more efficient path to closing a loan.

This article outlines key points that a lender should consider when assessing whether this strategy is appropriate under the circumstances. Specifically, it focuses on core provisions typically found in assignment and assumption agreements and how the strategy compares with a typical payoff scenario.

Benefits of Taking by Assignment

The strategy of taking by assignment usually arises when one or both parties to the transaction are either looking to:

1. Close quickly;
2. Minimize or altogether avoid the hassle, expense, and potential delays involved with obtaining new consents, waivers, and other agreements from third parties; or
3. Trump intervening secured lenders by stepping into the shoes of the existing lender from a lien priority standpoint.

Speed

From a simplistic standpoint, if you could get comfortable with all the existing due diligence and legal documents under the existing lender’s credit facility and then all you had to do to close was execute and deliver an assignment agreement, you could close within a matter of days. In reality, closing any transaction is almost never this simple; nonetheless, in its purest, most ideal form, it is clear how this strategy is attractive from a timing perspective. The more common scenario is that taking by assignment usually takes longer than simply signing and closing, yet is still less time-consuming than a straight payoff with the new lender preparing and negotiating a full suite of new loan documents.

It is important to note that most lenders will need to finish their customary diligence, KYC compliance, and background checks prior to taking an assignment, and such items as these can only be expedited so much. Furthermore, most lenders and their counsel will also require a review of the existing loan documentation. Any documents that may contain errors or omissions or may require updating due to the passage of time (e.g., disclosure schedules) may need to be amended or amended and restated. Preparing these amendments in advance of closing takes time and often starts to eat into the anticipated time savings.

One loan document that the new lender will almost certainly want to amend and restate is the loan agreement. As any lender knows, a loan agreement, especially the longer and more detailed varieties, can be very personal to an institution. Banks, for example, may require internal approval to forgo their usual formulation of anti-money laundering (AML) and Patriot Act representations, warranties, and covenants. Asset-based lenders will likely have eligibility criteria or reporting requirements specific to the institution that must be contained in the document. These are only a few of the reasons why a lender might find the existing loan agreement insufficient for its purposes going forward. In sum, most new lenders taking by assignment will prepare an amended and restated loan agreement, in the form of their institution’s form loan agreement, in advance of closing so that it can be in place from the closing date onwards. The amended and restated loan agreement is likely the most substantial agreement to be drafted and any complications or delays with its preparation or negotiation have the potential to reduce any anticipated time savings.

Efficiency

Often, parties to a proposed refinancing look back at the closing binder from the original closing and see an overwhelming number of third-party agreements, including landlord/warehouse/bailee waivers, deposit account control agreements, and intercreditor and subordination agreements. In this situation, assuming all of these agreements are fully assignable by their terms, the parties may decide that the most effective avenue to closing the deal is an assignment and assumption.

A substantial amount of upfront diligence is necessary before a new lender can determine whether the strategy, under the circumstances, makes sense. The new lender and its counsel will need to work with the existing lender and its counsel to quickly obtain copies of existing loan documents. The new lender, who is unfamiliar with the legal file, will need to understand the full scope of the documentation, both pre-and post-closing. It is important to keep in mind during such a review that each lender’s risk tolerance is different. For instance, the existing lender may have purposely not sought to obtain certain third-party agreements that the new lender routinely requires. The new lender should not assume that the legal file is complete from its own perspective; instead, it will need to determine if and when it will require that any "missing" agreement or filing be obtained. If one or more of these agreements are so important that they must be delivered before closing, the likelihood of obtaining that agreement is something to consider in the overall decision as to whether taking by assignment is the right approach for the new lender.

Regarding the existing file, each document should be reviewed to:

1. Confirm whether it is fully assignable or requires the prior written consent of the third party;
2. Ascertain whether the third party is entitled to notice of the assignment; and
3. Ensure it contains the same substantive legal benefits and protections the new lender would typically obtain for itself if starting from new, or at a minimum determine that the document is something it can "live with."

The new lender will also want to confirm that it is satisfied that the existing lender took all the necessary steps to properly perfect its lien on the collateral.

Agreements requiring advanced notice or third-party consent will have the potential to be problematic. Similarly, agreements that are substantively insufficient in their current form would need to be amended, either before or after the assignment. In such a circumstance, obtaining the third party ’s signature may be problematic. If, however, the new lender can smoothly advance past these considerations, it should be relatively easy to proceed. Any third party not entitled to notice or consent need not be dealt with. Still, some new lenders may want to send a simple notice informing the third party of the assignment and of the new lender’s contact information. More cautious new lenders may add a closing condition that the third party countersign the notice to acknowledge the assignment and agree that it remains bound by the terms of the existing agreement. A common practical consideration, relating to deposit account control agreements covering a borrower’s collection accounts (into which it receives proceeds of collateral and subjects them to an automatic sweep), is that the new lender will need to notify the depositary bank of their wire instructions for the sweep.

Lien Priority

The new lender will want to run updated UCC lien, tax, litigation, and judgment searches. To save money, they may check with the existing lender to obtain copies of any bring-down searches that may have been run at intervals since the closing date. Some-times, particularly with distressed borrowers, updated lien search reveals intervening liens that are currently junior to those of the existing lender, but would be senior to those of the new lender if the new lender refinanced the borrower through a traditional payoff. In this scenario, the new lender may opt to use the strategy of taking by assignment to leapfrog the intervening lienholders. If drafted properly, the assignment and assumption agreement (discussed below), together with any necessary UCC assignments, delivery of possessory collateral, and other notices of assignment will be sufficient for the new lender to essentially step into the shoes of the existing lender and acquire its prior perfected lien status.

Parties to the Assignment and Assumption

1. Existing lenders, as assignors ("Assignor")
2. Existing agent ("Existing Agent")
3. Existing letter of credit issuers ("LC Issuers"), if applicable
4. Existing swingline lenders ("Swingline Lenders"), if applicable
5. New lenders, as assignees ("Assignees")
6. New agent ("New Agent")
7. New letter of credit issuers, if applicable
8. New swingline lenders, if applicable
9. Borrower ("Borrowers")
10. Guarantor ("Guarantors") and other loan parties.

Note that counsel should thoroughly review the file for any loan parties who may have joined the credit facility in any capacity after the original closing date to verify whether they are a party to the assignment and assumption.

Assignments, Resignations and Appointments

• Assignment by Lenders:
  • For an agreed purchase price (discussed below):
• All of each Assignor’s rights and obligations in its capacity as Lender under the credit agreement and the other loan documents in the amount and equal to the percentage interest identified later in the Agreement of all the outstanding rights and obligations under the respective facilities.
• All claims, suits, causes of action and any other right of each Assignor (in its capacity as Lender) against any person, whether known or unknown, arising under or in connection with the credit agreement, any of the other loan documents or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory, claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to first clause above (collectively, the "Assigned Interest").
  • To the extent there are multiple tranches being assigned with multiple lenders on both sides of the transaction, it may be helpful to attach a schedule with a chart setting forth the various tranches, together with the various assignors and assignees thereof.
  • Each assignment is without recourse to Assignors and, except as expressly provided in the Assignment and Assumption, without representation or warranty by Assignors.
  • For clarity, the parties may wish to include a schedule listing all of the main loan documents being assigned. Be aware that, if this approach is pursued, a deep dive of the file may be necessary, especially if there have been multiple amendments and/or waivers, consents and post-closing documents executed and delivered since the original closing date.
• Assignment by LC Issuers and Swingline Lenders:
  • To the extent applicable, LC Issuers and Swingline Lenders assigns their respective interests in such capacity to the new LC Issuers and Swingline Lenders.
• Assignment by and Resignation of Existing Agent and Assumption by and Appointment of New Agent:
  • The Existing Agent shall be discharged from all of its duties and obligations under the credit agreement and the other loan documents in its capacity(ies) as administrative agent and/or as collateral agent.
  • Borrowers and Assignors accept such resignations and waive any applicable notice requirements contained in the loan documents.
  • Assignees appoints a new administrative/collateral agent as the successor agent. Assignees and Borrowers accept and consent to the appointment.
  • There should be a statement that, from and after the effective date of the Assignment and Assumption, the fees payable by the Borrowers to the New Agent under the credit agreement, any fee letter, and any other loan documents shall be the same as those payable to the Existing Agent in such capacities.

This ends Part 1 of this series. Part 2 (scheduled for October 2017 publication) will delineate additional specific items that should be in the assignment and assumption agreement.

“Refinancing the Borrower through an Assignment and Assumption: When, Why, and How,” by Jason I. Miller was published in the May 2017 edition of The Secured Lender. Reprinted with permission. To view the article online, please click here.